Email this article to a friend

Is the budget deal the final word on contractor compensation?

By
Jack Moore

Tucked away inside the bipartisan budget deal announced with much fanfare this
week is a proposal limiting the maximum level contractors can charge the
government to pay the salaries of their top executives to nearly half of what it
is currently.

The bipartisan budget bill, approved by the House Thursday, repeals a 15-year old
law tying contractor compensation to the salaries earned by private-sector CEOs
and limits the amount contractors can charge the government for executive pay to
$487,000, an amount that would rise slightly each year with inflation.

But it may not be the final word on the issue on the sticky issue of contractor
compensation.

For one thing, the bill requires the Defense Department and the Office of
Management and Budget to conduct a follow-up report within three months examining
whether alternative approaches to that hard cap would be more appropriate.

And for another, the budget deal's proposed changes to taxpayer-funded contractor
salaries are competing with another piece of bipartisan legislation currently
before Congress. The annual Defense Authorization Act, also passed by the House, seeks to lower the
compensation limit but by far less than the budget deal.

Bill repeals 'flawed' formula

In general, the contractor compensation cap sets limits on how much contractors
can charge the government for the salaries of their top executives. However, the
law doesn't bar what companies can actually pay their employees — it only
sets limits on how much can be charged to the government under cost-reimbursement
type contracts.

The current formula, which budget negotiators described as "flawed," has allowed government-reimbursed contractor pay to
grow in real terms by 95 percent since it was first used in 1998. Just last week,
the Office of Federal Procurement Policy announced the cap was set to
increase to about $952,000.

"It was glaring that the cap needed to be revisited," said Dan Gordon, the
associate dean for government procurement law at George Washington University Law
School and the former administrator of the Office of Federal Procurement Policy.

"While I have great sympathy for my friends in the contracting community, caps
that are above half a million dollars are simply too high for the American people
to accept," he added.

The Obama administration has long pushed Congress to lower the pay cap, calling
most recently for a $400,000 limit in May. Under Gordon's tenure at OFPP, the
administration earlier proposed a $200,000 cap.

Still, the administration supports the proposed cap in the budget bill.

"We are pleased that Congress is taking action to address the unjustifiably high
contractor executive reimbursement required under current law," said Frank
Benenati, OMB's press secretary. "The budget agreement now being considered by
Congress includes a new lower cap and other related provisions that are very
similar to the legislative proposal put forward by the President earlier this
year."

Industry laments lower cap

Under cost-reimbursement type contracts — a minority of federal contracts
— companies bill the government for their executives' time. But, under
longstanding federal procurement regulations, the government only has to reimburse
reasonable costs.

"No company worth their salt is going to charge costs that aren't necessary,
because in this market they're going get priced out," said Stan Soloway, president
and CEO of the Professional Services Council, which represents hundreds of
government contractors,

Still, Soloway agreed that the old formula needed updating.

"The issue here is to make sure the government isn't paying egregious salaries but
not harming companies' ability," to compete for top talent in a tight market, he
said.

Contractors and industry groups have maintained that an inflexible salary cap
would make recruiting competitive fields, such as technology, difficult. The
budget deal
does provide some "narrowly targeted exceptions," for highly sought-after
technical positions, such as scientists and engineers.

Soloway said he supported the lower contractor compensation limit contained in the
compromise National Defense Authorization bill also introduced this
week. That measure would have capped reimbursable contractor salaries at $625,000
and exempted more job positions, such as cybersecurity experts, from the cap.

The authors of the Defense policy bill, in a summary of the bill posted
online, said they had rejected a lower cap because it would "serve to drive
critical talent from the nation's industrial base."

Both the Defense bill and the budget deal are must-pass pieces of legislation
— and both garnered early bipartisan support. Even though the two conflict
on contractor pay, a Senate aide said it's too late to remove the provision from
either bill and that whichever one was passed later would be the law.